The Exchanges

Q So before we jump in, I'm really curious to ask you, was there some formative event in your life that precipitated you studying deaf language and culture?

A This is one of the stories where I'm glad that my kids are old enough now that they'll forgive me for my transgressions in my youth, but in sixth grade, my good friend Brandon wasn't prepared for the science tests, so he wanted to cheat on our sixth grade science test. He taught me the manual alphabet. He taught me how to fingerspell from A through E, which is as far as we had to go for the science test. And then from across the room, he would hold up a number of fingers for the question he was stuck on. And I would hold up letter D for the right answer. And that lasted for all of one test where we figured out that Brandon's eyesight wasn't good enough to see across the room to even see what I was holding up. But it got me curious and I wanted to learn more. It didn't make sense to me that deaf people would Finger spell to each other every time they had something to say. So I started looking into how deaf people actually communicate, which is far more robust. It's actually a beautiful thing to see a totally different language and language structure and language modality that just happens to coexist in our backyard that most people just don't have access to. So I studied it on my own. I learned from books. I would get videotapes from the library and learned a bit that way. It wasn't until I was later in high school that I first ran into a deaf person organically. It was at a doc…

AI assessment note: “in sixth grade, my good friend Brandon... taught me the manual alphabet”

Q What was your path from derivatives trading on a bunch of different exchanges over the decades to where you are today?

A So I started, like I said, on the floor of the Philadelphia Stock Exchange. In 1997, the firm was formed in 87. So by that point, we had grown to, I don't know, 350 or 400 people, I think, worldwide in the firm, and I was learning from experienced traders, working as an assistant trader. I quickly moved to a point where I was no longer assisting. I went through a trading class, and I was able to put Susquehanna's capital at risk. Pretty soon after that Got a tap to move to an upstairs trading desk, and moved up to trade American depository receipts, ADRs, which are shares of foreign companies listed in US dollars on US exchanges. There was an arbitrage relationship between where the price was trading in Germany, where it was trading in the US, and the currency exchange rate. We were also trading a bunch of fixed income products like municipal bonds, convertible bonds. We were very big and trading index products, so we were among the first group that really was providing liquidity in ETFs at the very start of ETFs. So all of these areas of trading were growing at the same time. And then I was asked to help open up a new trading operation in Europe. So Early 2000, we started to really expand internationally. We actually changed our name from Susquehanna investment group to a new parent company, which was Susquehanna international group, because we were now international. We had t…

AI assessment note: “I started, like I said, on the floor of the Philadelphia Stock Exchange.”

Q So as you're teaching people how to be traders, there's a bunch of things you could imagine reading and behavioral stuff and basic finance. Once you have all of the fundamental underpinnings of what you need, where do people start to really learn what it takes to being a successful trader?

A There are some things that you cannot teach in a classroom. We know that we're good at teaching the things in a classroom that we need to teach in a classroom. And then there are other parts of the decision process that we model in other ways, like by playing games with our trainees as they're learning. So we play things like poker and board games and chess and other games that model different parts of the decision process. But at the end of the day, there's no substitute for learning how to trade by trading. And there are a couple of ways that happens. One is before ever going through our trading class, our quantitative traders are working directly on trading desks, talking to the traders who are making decisions about the decisions that they're making, and they gain responsibility over time. So they will be responsible for trading a small book before we ever put them through the trading class where the trader can oversee what they're doing and help model appropriate decision making or ask them the appropriate questions that they have not yet built the internal capacity to ask themselves. Once they go through the trading class, in that class, we spend a lot of time mock trading. So putting them in trading situations that we can control and that we can pause at any time, and we can talk about the different branches of outcomes that they might have experienced instead of just ha…

AI assessment note: “there's no substitute for learning how to trade by trading”

Q How have you taken to the pursuit of different opportunities as you've grown and scaled?

A One of the things that I think we've been very good at is making sure that if we get into a business We understand where we're going to stand in that business, and we only pursue it if we think we can be excellent at it. We don't want to raise our hands and just be another participant in something that other people are doing. So we've had the good fortune of success. A lot of that, I think, from good practices and good policies internally, and certainly a lot of that from luck as well. And as we have been successful, that means that we've had more resources available to us that we can deploy in other venues. So we've moved into venture capital and private equity. We've moved into creating a sports trading unit that is trading on sports books in Europe, and that group is in Ireland. All of the growth has been in places where we have said we have a reason to think that we have internal resources that can support this in a productive way, and we're willing to put the capital behind it to be excellent at it. The other thing that's been really consistent is that in all the different products that we've gotten into, It looks different on its surface, but fundamentally, we are talking about risk allocation, or buying or selling risk at the appropriate price. Most recently, in the last few years, we've moved into insurance, which is where I spend all of my time now, is thinking about i…

AI assessment note: “we only pursue it if we think we can be excellent at it”

Q As you've been involved in training and educating traders that you brought in at a junior level over the years, what have you seen as the signposts of the ones that end up being successful?

A I think it actually goes back to the first thing we were talking about with my desire to learn sign language. It was something that I did not have mastery of, and I wanted to know it better, and it was entirely self-serving. It was just for me. Nobody else cared whether or not I learned sign language. Nobody was grading me on it. Everybody that we're bringing in as quantitative traders, they're all smart. They're all capable. They are all straight-A students in finance or physics or computer science or whatever it might be. What differentiates the ones who end up being great from those who end up being fine are the ones who just really, really want to dig in and get it and understand it and win the game, and you'll see people that will come up after a mock trading session and say, ok, I understand the basic options model, I understand these adjustments that we at Susquehanna make to the basic options model, and I pulled up the formula that we use to plug into the machines that are trading Our automated strategies, and it has this additional factor in it. What does that factor mean? And the person who's digging in deep enough to pull up the mechanics in the machine to see how it's trading and to see how that differs from what we're teaching them in an open outcry environment, that person is not doing it because they're getting paid an extra X dollars to do it. They're doing it b…

AI assessment note: “What differentiates the ones who end up being great from those who end up being fine”

Q I'm curious how you think about this in a portfolio context. And let me preface that by saying you mentioned getting into venture capital, which you could look at as buying call options. And you talk about insurance, which is selling put options. So when you put all this together, what's the frame of reference you bring to think about risk at Susquehanna as a whole?

A I like thinking about those products exactly as you talk about it. When we talk about it internally, we talk about our insurance business very much as being a short put business, which means basically The most we can ever win on the business is the price at which we sell the risk, but sometimes we can lose a lot. So we've got this asymmetric risk exposure that is one where we can lose a lot, but only ever win a little. And I agree that the venture capital business is one where you can only ever lose what you put into the business, what you buy in for, but sometimes you buy into a company like ByteDance and you happen to get in when it was not worth very much. And now it's one of the biggest social media platforms In the world, and you happen to be there at the right time. So you have this other piece of asymmetry where you can have huge upside, but you've got limited downside. That is exactly how we talk about the risks when we talk about it internally. But that does not mean because of the asymmetries that venture capital is a winning business because you've got this unlimited upside, or that insurance is a losing business because you've got this unlimited downside. Ultimately, what it comes down to is appropriate price. So you can go broke In venture capital by always overpaying. If you were always paying too much just because you've got this big upside, eventually you just r…

AI assessment note: “Ultimately, what it comes down to is appropriate price.”

Q How do you go about recruiting, both on the trading side and the technology side, when there is this area of mystique and opacity about the business as a whole?

A To some degree, I think that the mystique might be beneficial. It is on the trading side. It seems like people who are interested, college students who are interested in getting into trading don't know the details, but they do know enough to know that people who come to Susquehanna end up being successful, both in their career at Susquehanna and for those who choose to leave or for whom it's not the right fit. Those people still end up finding successful careers elsewhere. So I think that there the mystique has helped us. Candidly, I think on the technology side, it has hurt us. People know that if you go to Google, you're going to be working as a technologist, and they think they know what that means. Whereas they say going into financial services, am I just writing some pricing code that somebody is going to implement and not fully understand where that goes? I think we've done a better job recently of really explaining the growth and the opportunity and our use of really cutting edge technology with our prospective technologists. I think to some degree, they're also learning that going to some of the big technology companies might not be as rewarding as they thought it was going to be. What they end up doing is optimizing for ad sales and not saving the world like they thought they might've been, but It's a question that our recruiting team is frequently asking itself. How d…

AI assessment note: “Candidly, I think on the technology side, it has hurt us.”

Q So when you think about trading, even though the long duration capital is an advantage, you still think about relatively shorter timeframes. What is it about the traders at Susquehanna That have made the firm so successful in an extremely competitive market?

A I think there are a few things. One is that we focus a lot on the decision process, the information available, how we use that information, and then what trade we made. All of that way before we discuss the results. I think a lot of other people have that upside down. They say, how did you do? If you made money, great, keep doing what you're doing. If you lost money, that means that you took too much risk, and that's a bad thing. Whereas our traders are focused on the decision process and the expected value first. And because of that, We don't do things that I've seen some of our competitors do that we would think would bleed away some of those profits. So if you do all of your work, there's no selection bias, so there's no reason to think that you've gained new information by being able to enter a trade, and you got to buy an asset for 10 dollars that you think is worth 20 dollars. That seems great. And then somebody comes along and they say, they'll buy it back from you for 19 dollars. Do you want to sell it? A lot of people at that point would say, well, that's great. I bought it for 10. I sell it at 19. I make nine dollars. I put it in my pocket and I go away pretty happy and I sleep well tonight. Nothing bad can happen tomorrow with my position. I'm out of it, and I've just made my money. And at Susquehanna, we'd say, no, if anything, if we're able to buy more at 19, and w…

AI assessment note: “we focus a lot on the decision process... and the expected value first.”

Q What's the fundamental expertise that you need to bring to bear once you have the systems in place in a market like sports betting to make sure that you're accurately assessing odds of whatever the bet is?

A This is again that marriage of art and science. So some of it is being a good handicapper, being able to look at Jared Goff and decide how strong is he as a quarterback with this certain receiver core. That's part of it. And that is what we would refer to as the inside look, the inside view. Then the other part that matters a lot is the outside view, which is just sort of understanding statistically how well do offenses do in general against the various teams that the Lions are going to play this year. You need to understand all of the statistical relationships, how much variance there can be in that, and then applying the appropriate art in doing the handicapping with the inside view. So it's a combination of really making sure that you understand the underlying risk, and then tailoring it to whatever makes this risk unique, as opposed to another risk with a different team, different player, different score, whatever it might be.

AI assessment note: “This is again that marriage of art and science. So some of it is”

Q Why don't you take me back to what precipitated your time and your path to SIG?

A I am not the kid that was reading the Wall Street Journal at eight years old and asking my dad about stock prices. I took a very different path through college. I ended up studying deaf culture and language, so focused on American Sign Language and the deaf community. I thought for a while that I was going to end up being a math teacher in a school for the deaf, and then realized that that was probably not going to be a great fit for me, and started looking for jobs. My father suggested that I talk to a friend of his who was a broker on the New York Stock Exchange. And then I got up there and saw what the job entailed, and I realized it was definitely not appealing to me. Brokerage was not the right role. Sales wasn't a good fit for me, personality wise or constitutionally. It just wasn't where I belonged. But while I was there, I got introduced to one of the stock specialists for Susquehanna. And when I was talking to him, his story sounded a lot different than everybody else that I spoke to. And he talked about Decision making with imperfect information and figuring out the game and he compared it to playing sports, which was always part of what I enjoyed in my childhood. And it just so happened that the sport that you got to play was one where the skill set was in your mind as opposed to the physical skill set, but everything else about it sounded appealing. So it sounded li…

AI assessment note: “I got introduced to one of the stock specialists for Susquehanna.”

Q game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. As the markets have evolved over the thirty-plus years you've been at Susquehanna, you've seen, say, in the hedge fund world, this growth of multi-manager platforms. How do you view yourselves competitively to some of the bigger people that you see in the markets?

A We've been in a really nice position of having the most patient capital of all. One of the problems with hedge funds is that they have to frequently manage to Not just quarterly reports, but monthly reports, or even weekly and daily reports. So they've got to show that they're staying with the strategy that they have outlined for their investors, and that they're showing regular returns. Our investors, as we've said, are the principles of the firm. So they understand the risk. When we take outsized risks, they understand what they are. They're the ones who are driving it. If I want to put on a hundred million dollar insurance risk, where the full exposure is to the winner of the Super Bowl, I'm not worried that if we lose on that risk that I've got to now explain to a whole bunch of people why we just lost their money. Instead, I'm calling one person and saying, hey, are you okay with me taking this risk? Here's the edge I think I have. Here's the rate at which I can sell it. And he says, yeah, that sounds good. And he's monitoring it, and he's asking about it, and he's checking on the health of the quarterback through the season, all the things that you think would happen when you have that type of risk on. But because we've been able to be patient, we've been able to stay in businesses and grow businesses that have had downturns. And at the same time, we've been able to shut …

AI assessment note: “We've been in a really nice position of having the most patient capital of all.”

Q How do you think about your confidence in a type of assessment that's so much more qualitative than say options trading?

A Yeah, it's funny. You said confidence, and I wasn't sure if you mean strength behind convictions, or if you meant what are the bands around how wrong you could be. Confidence as in statistical confidence intervals versus confidence as in your bravado and walking in and saying, I just hit a home run with this investment. And why I say it's funny is because as I'm sitting here parsing your question, I realize it's the same question. The swagger piece comes from How sure you are that your bans about your uncertainty are appropriate. This now comes back to the asymmetries of the payouts is what we are unsure about is sometimes the upside or the exit. And I think, again, this is where patient capital has really helped us. If we had entered our ByteDance position, and it was in a fund where the investors needed to get paid back in five years, we would have closed out of that position and made a little bit. It would have been happy day in the office, and we would have been out of the position, and then eight years down the line, they would have seen what ByteDance became and said, oh my gosh, could you imagine if we had held on to that? So we get to revisit these decisions with new information to update our confidence over time, and that's part of my answer to your question of where do we get the confidence from, is that we don't have it on day one. Sometimes what we are doing is R&D …

AI assessment note: “we get to revisit these decisions with new information to update our confidence over time”

Q I'd love to dive into some of the strategic initiatives you mentioned earlier with that lens of how you think about it. Venture capital is a great place to start. What is the framework that you've used to think about this concept of expectancy within venture capital?

A You're absolutely right that in some ways this is different than the framework for expected value in option trading, for example. If I got to stand in a crowd and observe volatility and things like that, I'd be pretty comfortable trading options on a company if I didn't know what the company did. I wouldn't recommend it. It's not a great strategy, but I'm protected by the confines of the market. There's a lot of visibility into what the world thinks. There's a lot of visibility into arbitrage bounds on what something could be worth, and I can use that to my advantage if I'm trading options. Venture capital is very much a figure out what the current value of the space that this company is in, so technology or social media, whatever it might be, and then how good is the technology that this company has, and then how good are the people who are managing this? Because for the most part, I'd argue the most important thing with all of the venture capital and growth equity companies that we've invested in hasn't been the technology, although it's mattered, hasn't been the business that they're in, although it's mattered, and It's been the people that have been running it, because ultimately, they need to be able to adjust appropriately when market conditions change, they need to be able to pivot at the right time and stay the course at the right time and all the things that go into ru…

AI assessment note: “Venture capital is very much a figure out what the current value of the space”

Q When someone's learning and getting up the curve, what are some of those most important questions that a more senior trader might ask someone that they need time to learn to ask themselves?

A If I had a script for it, it'd be easy, because then I would just give people a script to use as a checklist like a pilot does when they're starting up their plane, or like a surgeon does when they're starting a surgery. I don't have a script, and I wish I did, because then I could hand it off to somebody. Instead, it's more like a grammar. There are things that you know how to do grammatically that you could not describe. If I were to say to you that I have eight large red French soccer balls, you would know what I mean. It makes sense. And if I were to change the order of the adjectives, it would sound crazy to you. If I moved one adjective and I said, I have eight red French soccer large balls. I would sound certainly not like a native speaker, and you would have a hard time explaining what the right order is for adjectives. A lot of people have gone through and tried to describe the rules here, and it comes down to its number, opinion, size, age. Shape, color, origin, material, and purpose, I think, is the right ordering for the way you use adjectives, and you just know that. You know that because you're a native English speaker, you've been using the language long enough that something sound right and something sound wrong. In the same way, when junior traders talk about trades, they might point out something that just feels like it doesn't matter compared to something big…

AI assessment note: “I don't have a script... Instead, it's more like a grammar.”

Q Tom, what does SIG look like in five or 10 years from now?

A It's a great question. And The only thing I know about my answer here is that I'm going to be wrong, which is exciting. If you had asked me five years ago, I'd be wrong about where things have grown today. The one thing that I would have been right about then, that I think I'll be right about with this prediction, is that we are going to stay dominant. That because of our approach to risk management, because of really a conservative approach to growth, where we're not leveraging other people's money, where we're not leveraging the future in order to do stuff, but we're really growing from what we have, that we're going to be bigger. We're going to stay dominant in the areas that we're in. And we're going to keep finding unique ways to take risk, and I think we're going to keep having fun doing it.

AI assessment note: “we are going to stay dominant... we're going to be bigger”

Q I'd love to turn to prediction markets and what you're doing with Calci. How are you participating in those markets?

A So Calci's got a great product. We've been talking about binary outcome futures products for Gosh, at least 20 years. And a big part of it was finding the appropriate technology for it and finding the appropriate outreach, while also doing it in an appropriate regulatory and compliance environment. And Cauchy has solved for those problems in a lot of really good ways. They've done a good job of finding ways to quickly register new products with the CFTC, the Commodity Futures Trading Commission, so that there has been a rapid turnaround when people Have risk that they want to transfer on the Cauchy platform to them being able to list it and it being tradable. The binary outcomes, and not all of their products are binary, but a lot of them are, is really nice in terms of interpreting what it is that you are trading. So by binary outcome, I mean that the trade will settle at a price of either zero or one. So, I'll use elections as an example, because they are not tradable on Calci, and they are not tradable by the CFTC, so this way I'm not talking about an actual product, but Ted, let's say that you and I are running for next president of the United States, because I don't think anyone really wants to talk about the actual politics right now, but let's say it's a two-man race between you and me, and we can go on Calci and look at our pricing, and you're trading at a price of 67 c…

AI assessment note: “So Calci's got a great product. We've been talking about binary outcome futures”